With political news dominating the headlines, the U.K. set to “Brexit” in October, and tensions rising in Iran, there appears to be no shortage of external risks for investors both domestic and abroad. Nonetheless, low interest rates, unemployment, and strong corporate earnings indicate that the U.S. is still performing well economically, as the bull market marches toward an 11th year of expansion.

U.S. Stock Market

Despite the risks highlighted above, the stock market, as measured by the S&P 500, still remains positive by approximately 20% year to date. More specifically, stock performance for the 3rd quarter was somewhat muted, albeit slightly positive for U.S. market. Domestic stocks rose around 2% for both the S&P 500 and Dow Jones Industrial Average. Smaller stocks, as seen through the Russell 2000 Index, retreated (2.4%) during the period. The healthcare segment remains the biggest lagging sector of the year although these stocks still have posted a year to date gain of almost 5%. This sector will likely continue to see volatility as healthcare remains a focal point for politicians who may legislate price limits ultimately affecting corporate profits.

International Stock Markets

International stocks squeaked out similar gains for the quarter with developed market stocks advancing 2.9% as seen in the EAFE index. Emerging markets posted a similar 1.9% return for the quarter. Despite these gains, numerous conflicts remain globally that can provide for some added risk for investment. Manufacturing has contracted further as seen through data for the Eurozone and Japan. This suggests a further slowdown for these regions. Boris Johnson of the UK is continuing to offer proposals to the rest of the EU to reach an agreement. The UK is set to “Brexit” from the rest of the EU with or without a deal in place on October 31st.

Fixed Income & the Fed

As expected, the Federal Reserve lowered its key Federal Funds Rate by a quarter of 1 percentage point on September 18th to a range of 1.75 to 2 percent. This was their second cut since late July. Commentary from Fed Chair Jerome Powell suggests that there could be additional cuts forthcoming in order to support a weakening economy.
The 10-year Treasury yield fell over 60 basis points from July into August before rising slightly in September. Accordingly, this drop in interest rates led to a 2.3% return for the quarter in the Aggregate Bond Index. An important event worth noting for the quarter was the inversion of the 2 and 10 year treasury yield curve. This inversion is a popular indicator of an upcoming recession, however, as discussed in a previous commentary, an average return of 21% up to a market cycle’s peak has occurred prior to the last 5 recessions after the yield curve inverts. Additionally, this market cycle and bond market is very different then the past given the distortion of the bond market caused by The Fed’s Quantitative Easing Program.

Gold and Oil Prices

Gold prices continued to rally in the 3rd quarter gaining about 8.4% and closing the month of September with a price of $1,472 an ounce. This represents an almost 16% increase for 2019.
The year to date price for Brent crude oil has increased about 13% through September. Prices were particularly volatile in the 3rd quarter, with a bottom price of just $55 a barrel in the beginning of August to a peak of over $68 a barrel by the middle of September, before leveling out to about $60 by the quarter’s end. The September spike was the result of an attack on a Saudi oil facility on September 14th.

4th Quarter Perspective

Investors may be wondering if the end of 2019 will bring about another sharp downturn as seen in the later months of 2018. Past market data, however, indicates that the end of the year is often accompanied with rising stock market prices. In fact, the 4th quarter typically posts the strongest returns for the year. The 4th quarter has generated average gains, as measured by the S&P 500 from 1980-2018, of 4.1%. This compares favorably to average gains of 2.6%, 2.7%, and 0.3% for the quarters of the year, respectively. While risk of decline is always possible with stock investing, predicting that stocks will decline in the 4th quarter for 2019, based on just last year’s performance, appears illogical. Additionally, keep in mind that the cause of the market decline at the end of last year was the sudden rise in interest rates. Given the recent fall in interest rates, an about-face appears unlikely. We will continue to monitor the markets carefully and look forward to assisting and advising you through the rest of 2019 and beyond.
Respectfully Submitted
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Francis C. Thomas CPA, PFS
Robert T. Martin, CFA, CFP®
Jeff Hilliard, CFP®, CRPC®
Gordon Shearer Jr., CFP®

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